This article was first published in the Irish Times, 18 February 2022.
The M&A landscape continued to be dominated by the technology, media and telecommunications (TMT) and pharma, medical and biotech (PMB) sectors during 2021. Other high performing sectors in what was a record year for transactions included financial and business services and consumer goods.
“Financial and business services were particularly active at the top end of the market, with the expansion of the three domestic banks through the carve-ups of Ulster Bank and KBC Ireland and the sale of Davy and Goodbody Stockbrokers,” says Sandra Lord, a partner with Matheson’s Corporate M&A Group. “Consumer was also a hot sector, with the €1.7 billion acquisition of Valeo Foods by Bain demonstrating the attractiveness of food and beverage assets.”
Healthcare was another strong contributor to volumes, according to Davy head of technology corporate finance Peter Bennett, who cites UDG’s sale to CD&R and Icon plc’s acquisition of PRA Health.
He also notes that the largest deal in the Irish market this year in the aircraft leasing space – AerCap’s acquisition of GE CAS for more than $30 billion.
“Generally speaking, there was activity across all sectors last year in Ireland as conditions for M&A remained favourable both domestically and internationally,” he adds.
The insurance sector was another hot spot during 2021. “There was a huge amount of activity in the insurance broker sector,” says DLA Piper partner Matthew Cole. “There are a number of broker consolidators active in Europe and the Irish market is very fragmented with lots of small brokers dotted around the country. It’s ripe for consolidation. We have also seen some activity in the wealth management space.”
These aren’t the only sectors experiencing this activity. “There is also a bit of consolidation in veterinary practices,” says Paddy Dillon, head of corporate finance with Grant Thornton.
He also notes strong activity levels in the traditional industrial sector which includes engineering and manufacturing firms. “Solid businesses in this sector with good defensible customer bases have been commanding good valuations. In many cases, the promoters had taken the business to a certain level and felt it was time to move on. We are seeing a lot of that. The other area where we have been seeing strong levels of activity is business services such as facilities management, fire protection, alarms, and maintenance services.”
Looking ahead to the rest of 2022, Deloitte corporate finance partner Anya Cummins says the pipeline looks similar to last year with the technology, financial services, and healthcare sectors continuing to dominate.
Financial services include investment management, wealth management, insurance, and fintech while healthcare covers specialist care providers, homecare providers, and private hospitals among others. “We are also seeing activity in general industrials which are scaling internationally as well as in the consumer sector, particularly companies with strong brands. The food and renewable energy sectors will continue to attract interest.”
“The themes coming through are sustainability and anything with an ESG focus,” adds Jan Fitzell, a partner with Deloitte’s M&A advisory team. “Anything there is getting a lot of attention.”
A&L Goodbody partner and head of M&A Richard Grey agrees. “We expect to see increased levels of activity in renewable energy transactions driven by the increased ESG compliance and reporting obligations of institutional buyers and their investors and limited partners.”
Lord believes the record levels set in 2021 are likely to persist. “Traditional indicators suggest that the deal making surge is set to continue and we expect that the sectoral trends we have seen over 2021 in terms of deal activity – with TMT, PMB and banking and financial services to the fore – will continue over the course of the next 12 to 24 months,” she says.
However, one source of activity may see a drop. “Special purpose acquisition companies – otherwise known as Spacs – were a frequent feature of the M&A landscape in 2021, with the asset class having its strongest year by volume,” she adds. “However, given the increased scrutiny by regulators – together with concerns over the share price performance of a number of Spacs, as well as other factors – there is a sense in the market that the level of interest in Spacs as a driver of M&A activity in 2022 is somewhat uncertain.”
Cole believes it will be busy, but not quite as busy as last year. “There are probably some headwinds coming up, but it will still be very strong. Private equity still has a lot of cash to deploy. Post-Covid, a lot of corporates will be looking at their strategy and considering divesting non-core assets. They will be using that to reinvest in the core business.”
The availability of finance will continue to drive activity in 2022, according to Grant Thornton corporate finance partner Michael Neary. “The environment in 2022 will be very positive,” he says. “That’s due to a couple of factors. We still have low interest rate environment and there are lots of private equity and trade players with accumulated cash. In a high inflation environment they are looking for good assets with good cash flow which they can merge into other businesses or use as platforms for further acquisitions.”
There are some clouds on the horizon, however. “Volatility returned to the equity markets early in 2022 with some indices now in technical correction territory,” says Bennett. “This will impact the M&A market which prefers stability, consistency and a clear outlook. Volatility has come in response to inflationary pressure following the massive fiscal stimulus deployed during the Covid timeframe. This is resulting in the markets’ expectations of interest rate hikes increasing in frequency and coming sooner than expected.”
That difficulty also presents opportunities, he believes. “I expect 2022 to favour stronger, larger, better capitalised acquirors who were patient in recent times and will now look to capitalise on moderated valuation levels and weakness in less stable targets.”
He expects activity to continue in the financial services and fintech sectors among others. “In a rising rate environment, valuations for interest rate sensitive institutions are expected to lift, performance should improve and a push for scale will emerge. This should support bank and asset manager consolidation, particularly in Europe via cross-Border transactions.”
Financial services firms
He says traditional financial services companies will look to acquire fintech capability now that the “build vs buy” dynamic is shifting tentatively in their favour. “This trend aims to protect their position against rapidly scaling fintechs such as Stripe, Klarna and Revolut that are increasingly encroaching on their territory.”
Lord sees the consumer and healthcare sectors as areas of strong activity in the year ahead. “M&A within the consumer sector is likely to heat up, as buyers look to adapt to changes in consumer behaviour seen amidst the pandemic – particularly in relation to online shopping, home improvement, fitness and gaming,” she says.
“Nursing homes will continue to be a target for M&A activity and we expect to see further consolidation of insurance brokers, the play here for a number of large players being to buy and build to allow for economies of scale. Digitisation will likely shape the M&A sector in 2022. With digital technologies unleashing ever more change in industry structures and company business models, mergers, acquisitions and divestitures are an important way for companies to reposition their organisations to compete in the digital age.”
Many companies have proved very resilient during the pandemic, and this will see their valuations remaining strong. “Predictability of earnings is key to valuations in many sectors and the resilience of certain businesses through the pandemic has underpinned confidence in forecasts, which has in turn supported robust valuations,” says Grey. “Many companies have also shown great adaptability, with the pandemic acting as a catalyst for innovation and responsiveness to customer needs. The technology sector, and in particular those businesses which facilitated online or remote service delivery such as Flipdish and Fenergo, had very strong performances during the pandemic. During the course of 2022 many of these businesses may well look to take advantage of their strong performance and valuations through a transaction.”
And the outlook is also good for those who have not fared so well. “For companies facing legacy crystallising liabilities, cash flow will be key, together with their ability to negotiate additional runway for trading recovery,” he notes. “If the economic outlook remains strong, we think valuations are likely to generally hold up, other than for those companies who face liquidity issues.”
DLA Piper partner Eanna Mellett does foresee some softening in valuations, however. “It depends on the sector, but I think valuations will come down a bit. We saw some crazy multiples last year. That was partly driven a bit by private equity houses who had a lot of cash and had to spend it. We have seen some deals recently where hoped for valuations haven’t been reached. We may well have seen the top of the market last year.”
And the after effects of the pandemic could actually drive further M&A activity, according to Dillon. “One of the reasons we have been seeing a lot of M&A is the psychology of a typical entrepreneur,” he explains. “When Covid hit they were worried about seeing their life’s work evaporating in front of their eyes. People who had been thinking about exiting at some point in the future are now moving into action and doing it.”